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Energy Information Administration predicts short-term energy price surge Agency says crude oil prices have been higher than expected following a slump in April; natural gas prices up steeply due to “fragile” supply Petroleum News Alaska
The U.S. Department of Energy’s Energy Information Administration said in its June energy outlook that it expects a short-term energy price surge.
The agency said renewed strength in world oil prices following a short-lived slump in April and a dramatic rally in domestic natural gas prices in response to weak storage injection performance and general worries about near-term gas supplies has prompted it to sharply increase expected levels for energy prices in the short term.
The oil price adjustment for the June outlook is “a shift in the expected level and not a move away from the conviction that prices should trend downward from current levels by year end,” the agency said.
The EIA said higher crude oil prices and generally low inventories have resulted in some greater-than-expected tightness in gasoline markets, particularly in the Midwest. Hopes for an early peak in pump prices have given away to expectations of some continued increases in June and possibly July.
Natural gas prices will be kept high by surprisingly strong growth in electricity demand and may be followed by robust growth this summer, enhancing concerns about gas supply keeping up with demand during the storage injection season. The agency said continued wide swings in natural gas prices are likely to be a feature of this summer as long as the vagaries of the weather play such an important role in the outlook for gas supply over the next six to nine months.
Eighty cent a barrel increase seen in crude oil The monthly U.S. imported crude oil price rebounded in May to an estimated $26.75 per barrel level ($28.82 West Texas Intermediate crude oil), about $1 per barrel below the previous peak seen in March.
The $4-a-barrel dip in April, following OPEC production increases, was an over-correction, the agency said, and the current higher price range for world oil prices is more in line with world oil market fundamentals.
An additional 80-cent-per-barrel increase is likely in June, and persistence at or near the $27.50-per-barrel range is expected through the summer without an unexpected change in oil supply.
The EIA said that estimates of world oil supply and demand lead it to believe that world oil prices should remain at or above $26 a barrel ($28 a barrel WTI) for most of the remainder of 2000, with prices expected to gradually decline in 2001 as supply increases faster than demand. The agency expects that the world oil price in 2001 will be about $23 a barrel.
OPEC may increase production At the March OPEC meeting there was an informal agreement to decrease OPEC 10 (Organization of Petroleum Exporting Countries excluding Iraq) supply by 500,000 barrels per day if the OPEC Basket price averages less than $22 per barrel over a 20-day period and to increase the OPEC 10 supply by 500,000 barrels a day if the OPEC Basket price averages over $28 per barrel over a 20-day period.
The EIA said that as of the publication of its June forecast, “it appears that the OPEC Basket price may average over $28 per barrel during a 20-day period ending sometime in early June,” but said it did not include additional OPEC 10 output in its base case.
If the OPEC 10 countries do increase actual output by 500,000 barrels per day in early June, the EIA said it expects oil prices to end up about $1-$2 per barrel less than assumed in the forecast. If on the other hand, the OPEC 10 countries fail to increase production in the third or fourth quarters of 2000 as assumed in this forecast, higher oil prices would be expected.
The forecast assumes OPEC 10 crude oil production will be 25.2 million barrels per day in the second quarter, 0.8 million barrels per day above first quarter production levels — about 0.5 million barrels per day above their production target of 24.69 million barrels per day.
Iraqi crude oil production is assumed to average over 2.3 million barrels per day in the first quarter of 2000 and increase through the remainder of the year to average about 3.0 million barrels per day in the fourth quarter of 2000.
Non-OPEC production is expected to increase by 1.2 million barrels per day in 2000 and by another 0.8 million barrels per day in 2001, primarily from the North Sea, the former Soviet Union, Mexico, South America and Africa.
Growth in world oil demand was assumed to be 1.4 million barrels per day (about 1.8 percent) to average about 76 million barrels per day, compared to growth in world oil demand of 1.1 million barrels per day (1.4 percent) in 1999.
Natural gas supply situation “fragile” The agency said that spot wellhead prices for natural gas had been averaging more than $4 per thousand cubic feet since late May, nearly doubling since the beginning of the year. Although rising crude oil prices have encouraged gas prices to climb, by far the major determinant for these robust gas prices has been the fragile supply situation.
The injection rate for natural gas into storage, the EIA said, has been “too slow to comfort the market for next winter’s heating season,” with underground working gas storage levels currently about 20 percent below year-ago levels.
At present rates of injection, the availability of gas for next winter has become uncertain, as reflected in the volatility and levels of current prices.
Hot weather in parts of the country using gas-generated electricity has also contributed to the rapid price rise, with gas that would otherwise be injected into storage is now being used (indirectly through electric utilities) to run air conditioners. The agency also cited growing demand for natural gas over the last seven to eight years to the expanding economy and the increasing role of gas generation at power facilities.
Short-term natural gas supply constraints While natural gas imports have generally been rising significantly in recent years, the United States may be running into some short-term supply constraints, the EIA said. Several years of relatively low prices have slowed down exploration and drilling for new sources of supply. Recent higher prices have caused drilling to rebound, but new supplies may not begin to yield significant improvements in actual production until after this summer.
Natural gas prices are projected to increase by 50 percent this summer (April-September) compared to last summer and by 60 percent this winter (October-March) compared to last winter.
The wellhead price for the year is projected to average more than $3 per thousand cubic feet, with a slight easing of the price projected for next year, based on normal weather.
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